India Banao!

India’s social challenges are daunting. A young population has to be educated, tens of millions of new jobs have to be created every year, a massive urban migration has to be absorbed without social disruption, and a safety net has to be created for all. And yet, despite a faltering global economy, India is making progress. Families are moving into booming new cities built entirely by real estate companies, parents are scraping together their savings to educate their children in private universities, and the unbanked are now equipped with smart cards provided by micro-finance players. Our business and social entrepreneurs are solving our most difficult social challenges. This is development the Indian way: an entrepreneurial market-based approach, quite distinct from the state-driven approach followed by China.

Three sectors – urban housing, education, and financial services – demonstrate how India is tackling its challenges. Consider urban housing. Till a few years ago, most Indian cities were woefully lacking in affordable housing and were simply unable to absorb the millions of migrants flocking to large cities. Between 1998-2004, the NDA government reduced real interest rates, introduced the mortgage interest tax deduction, and lifted urban land ceiling restrictions. State governments implemented slum rehabilitation policies. The UPA government’s JNURM is now improving transportation, roads, and other infrastructure.

India’s real estate entrepreneurs saw huge markets opening up and jumped in. DLF, Unitech, Orbit, DB Realty, Sobha and many others are developing vast new projects. There are cranes everywhere as millions of new flats are constructed, and entirely new cities (such as Gurgaon and Lavasa) are being created. The capital markets are playing a critical role, enabling real estate companies to raise equity capital quickly and efficiently. India’s real estate companies now account for about $30-50 billion in market capitalization, creating a host of real estate billionaires.

The education sector is being similarly transformed. Half of India’s population is under 25 and there are about 500 million children. Parents recognize that education is the best way for their children to secure a steady job and lift themselves out of poverty. Both the UPA and NDA governments have pushed universal education and instituted programs to improve the quality of government schools. The UPA government is now looking to improve quality standards across educational institutes, provide student loans, and enable foreign universities to enter the education market.

India’s business and social entrepreneurs have seized upon opportunities in the education sector. A wide variety of private schools, colleges, universities, and vocational institutes are flourishing. Even the remotest village is plastered with advertisements for English language and computer training programs. Entire education cities have emerged such as in Kota, Rajasthan and Manipal, Karnataka. Educomp, Everonn, and Heymath! are working in government schools to bring in computer-assisted learning and improve teacher capabilities. Huge new private universities have been set up by the Manipal Group, Amity, and ICFAI. The Indian School of Business is now ranked 12th globally and is opening another campus in Mohali. Pratham, one of India’s most admired NGOs, is running the national Read India program to develop reading skills for 60 million children. Another NGO, Prayas, is working with abandoned children in urban slums and the poorest rural areas to provide them shelter and then vocational training. Each of these entrepreneurs has been backed by a variety of financing sources including venture capital, private equity, the stock market, and various philanthropies.

Similarly, the micro-finance industry is bringing affordable financial services to India’s enormous unbanked population. The RBI has allowed banking agents, mobile payments, and no-frills bank accounts. PSU banks have to set up branches in rural areas and set-aside sufficient capacity for high-priority lending such as in agriculture and student loans. Most importantly, the Unique ID Authority is rolling out a biometrics-based national identity system, which will massively streamline financial transactions.

The micro-finance industry is exploding. For-profit players such as SKS Microfinance, Ujjivan, Janaalakshmi, and Equitas have grown rapidly with backing from venture capital and private equity firms. There are literally thousands of NGOs operating self-help groups. The ICICI Foundation has also funded many different projects to explore how best to provide financial services to the unbanked. Fino has issued over 10 million smart cards to the unbanked. Finally, several philanthropic investment firms such as Unitas Equity Fund and Legatum have been investing in the micro-finance industry.

The dramatic growth of these sectors in the last decade highlights the uniquely Indian approach to economic and social development. Growth is driven by unlocking latent end user demand, rather than by government directed investment. India’s highly innovative business and social entrepreneurs deliver affordable products and services to tap this demand. A wide variety of financiers, ranging from early stage VC funds to massive global equity funds to a fast-growing banking system, stand ready to provide risk capital to successful firms.

What will it take to sustain this entrepreneurial, market-based development? First, government must continue to cede economic space to the private sector, establish appropriate regulatory frameworks, and provide essential infrastructure such as the national identity system and urban transportation systems. Second, an entrepreneurial economy must be protected from oligarchs that can manipulate the political system and thwart competition. Third, if the state is unable to efficiently operate large-scale welfare programs, poorer sections of society can be left behind creating enormous social pressure and even violent uprisings. Finally, wise macro-prudential regulation is required to prevent destructive boom-bust cycles.

The great Indian experiment is on. Only by fully unleashing the entrepreneurial energy of our nation can we solve our vast social problems.

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After Independence, India became a much more open, meritocratic nation. Existing power structures were demolished and a talent-driven elite emerged. Unfortunately, these trends are now being reversed. We are moving once again to an ossified society with entrenched business and political aristocracies. This is profoundly counter to building an open society that ultimately drives innovation and national growth. We should pursue several different measures such as inheritance taxes, better economic regulation, open primaries, and public funding of elections to once again put India on the right path.

Openness and innovation power a nation forward. It is not natural resources or large armies, education, or a fine constitution. Philosophers and economists have always pondered over the problem of economic and social development, turning over one theory for another as new research has trickled in. Slowly, a hypothesis is taking shape. It may well be supplanted by more sophisticated frameworks; but at least for now, our best guess is that innovation (both economic and institutional) is what counts. Talented people working hard at new ideas come up with inventions that transform daily lives. As evidence consider: the permanent road network of the Roman Empire, the stirrup invented by the tribesmen of the Steppes, the development of the steam engine and railways in Britain, and the system of checks and balances embodied in the American Constitution. A great nation is an innovative nation that rewards insight and persistence.

Innovative nations have open societies with multiple pathways to power and wealth. Talented individuals are allowed to take risks and capture the upside. The elite are rejuvenated by new thinking, new industries; great wealth and fine institutions are created, and the nation prospers. Such a nation is a meritocracy - a nation that can find and reward hundreds of A.R. Rahmans, Sachin Tendulkars, and Amartya Sens. On the other hand, ossified societies are controlled by entrenched aristocracies that check newcomers and thwart change. These aristocracies seize the levers of wealth and power, and ultimately hollow out the nation. Growth slows down because aristocracies are more focused on preserving the existing economic and social order. Ultimately, when new external and internal challenges inevitably arise, economic growth collapses as the aristocracy rushes to protect what they have.

The Independence Movement followed by the abolition of the princely states led to a massive opening up of Indian society. Caste equations, power structures, and entrenched interests were all overturned. New meritocratic institutions were created such as the IITs, IIMs, and AIIMS. The civil services (including the IAS, IPS, IFS, IRS, and IAAS) and the army were constituted through open examinations and largely meritocratic promotions. Difficult entrance and board examinations ensured that admission to the best colleges was done in an open and transparent manner. In short, we created an India where talent was recognized and rewarded. We built an amazing talent pool that was poised to breakout. When India liberalized, this talent pool seized the opportunities, and we are enjoying the benefits now.

But India is now becoming a more ossified society with clear emerging aristocracies. In business, there are 10-15 major business families that control most of corporate India. Apart from the PSUs and MNCs and a few entrepreneurial technology firms , most Indian companies have been in family hands for generations. Over time these family empires have become vast conglomerates that control wide swathes of the Indian economy. Just consider the Ambanis, Mahindras, Tatas, Birlas, Ruias, Wadias, and Godrejs. With no inheritance taxes, it is easy to pass these empires from one generation to another. These family empires are led by outstanding businesspeople, have deep pockets, and have built outstanding organizations. As a result, they have huge advantages over the entrepreneur starting in a garage – particularly, in the capital-intensive industries that they favor. Moreover, India still has many industries that rely on agreements or contracts negotiated with national and state governments (such as power, steel, mining, and infrastructure). It is very difficult for smaller companies to break into these industries, enabling today’s family conglomerates to grow with only each other as competition.

Politics presents a similar picture. Since Independence, 10-15 major political families have controlled most Indian states and they hand control from one generation to another. We can start from Kashmir and go down to Tamil Nadu. The story remains the same, across the Gandhis, Scindias, Pilots, Reddys, Dikshits, Bahugunas, Yadavs, Patnaiks, Abdullahs, Pawars, Thackerays, Sangmas, Gowdas, Rajes, etc.. Our states too have become family empires with CMs being able to push their children as MPs and MLAs. With the ability to grant tickets at will and full control over the state’s administrative apparatus, these local satraps have ensured that their families handily win elections.

We are now also seeing the rise of business/political families that see the benefits of controlling both economic and political power. In the past, business families have stayed away from politics and tried to maintain their neutrality. That is no longer the case with the Marans, Pawars, and Reddys who leverage both politics and business to their benefit.

India’s well-entrenched business and political aristocracies diminish our nation. We have to create an open society that enables talented individuals to rise to the highest levels, whether they are AB Vajpayee or Dhirubhai Ambani. There are many measures that we can adopt that will ensure open opportunity for all. For instance, inheritance taxes can make it hard to pass business empires from one generation to the next. Similarly, open political primaries and transparent funding of elections through election trusts can prevent political families from becoming too powerful. However, even these are no panaceas – as the USA has shown – and the price of liberty remains eternal vigilance

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Corrupt paternalism defines the Indian state (sarkar) today. With 75 percent of India’s population making less than $2 per day, a mai-baap sarkar that controls most economic and social activity may seem inevitable. After all, if the government does not guarantee such basic rights such as the right to food, right to health, right to education, right to work, and so on, who will? The mai-baap sarkar has been the ruling ideology for most of independent India. In fact, it is deeply rooted in India’s long history of Rajas, Maharajas, Nawabs, and Sultans. But we must challenge this orthodoxy because the mai-baap sarkar is neither serving the citizen nor the state well.
The citizen is poorly served by the mai-baap sarkar. Today most of the development activity of the state is focused on executing large, centrally mandated development programs such as NREGA, the Public Distribution System, and Indira Awas Yojana. Hundreds of studies have shown that that these programs do not work as planned. Most benefits are captured by deeply corrupt local administrations, panchayats, and politicians. BPL benefits are captured by well-off families, NREGA identities are forged at mass scale, and food grains intended for ration shops are sold in the grey market. Meanwhile, the intended beneficiaries run from pillar to post to secure their rightful benefits. PMs from Rajiv Gandhi to Manmohan Singh recognize these ground-level realities but continue to pour money into this black hole of corruption.
The state is a big loser too. Since the neediest citizens do not benefit, there is continuous political pressure to keep increasing spending for these leaky entitlement programs. Valuable tax revenues are squandered. The fiscal deficit continues to build up making it difficult to pursue other major national priorities such as defense and infrastructure. With BPL families receiving only limited benefits, they are unable to break the poverty trap and remain reliant on their meager government benefits. This fosters long-term dependency further straining government finances.
Markets and credit rating agencies are well-aware of these pitfalls because many other countries such as Mexico and Brazil have floundered on these same dilemmas. Leaky entitlement programs become a heavy burden on the government and the overall economy resulting in low sovereign ratings and curtailed growth. Government borrowing becomes expensive, interest rates remain high to check inflation, and productive investment stalls. Ultimately, the fiscal deficit becomes unsustainable, putting pressure on the currency and raising inflation, which further impacts the poor.
India is headed down this path. The nation paid a heavy price for the UPA victory. By some calculations, the UPA has created incremental liabilities of over 400,000 crores through NREGA, the loan waiver, oil price subsidies, the Sixth Pay Commission, and other populist gimmicks. Our fiscal deficit is now about 13-14% of GDP and likely to rise further.
Is there a way out of this mess created by the UPA’s mai-baap sarkar? Yes there is, However, implementation will require both political will and a clear understanding of the role of the state in a modern, globalized economy. Simply put, we must move from a mai-baap sarkar to an umpire sarkar. The government has to get off the playing field and let the citizens be the players. We cannot have the state be the umpire and also play most of the game while citizens watch from the sidelines. The role of the state has to be defined clearly as establishing and enforcing the rules and letting citizens be the players on the field.
Thus the state must ensure the rule of law, property and tenancy rights, and financial inclusion in every village, slum, and mohalla in the country. This is hard work and will take all the energies of our government machinery. Today the police are used to threaten and browbeat citizens, rather than protecting them. Our poor do not feel secure just now – they are oppressed by powerful goondas, politicians, and landlords. We will need to substantially expand, train, and equip our police forces. The police must root out local corruption and intimidation. Is the Home Ministry at the Centre and in the States ready for this task? Can our Courts handle the workload?
Land titles are not digitized, transparent, and easily accessible. As a result, property rights at the local level are difficult to establish. Land owners cannot monetize or collateralize their property creating a major drag on the economy. In cities, digitized land titles are essential for calculating property taxes and transferring ownership. None of that is possible today. Land records are opaque and easily manipulated so that money can be extracted by intermediaries. Tenancy rights are equally opaque and inaccessible. A national mission must immediately be launched to streamline all land records. If we can do this for the national identity system, why not for land records?
Finally, we must also extend our financial system to include all our citizens. Every Indian citizen should have a bank account or some electronic way to access government benefits (e.g., stored value smart cards). Once benefits are electronically available, forged identities and benefit leakage can be dramatically reduced. There are other major benefits. For instance, every girl child could be given a National Savings Certificate at birth, which would mature at age 21 for Rs. 1 lakh in today’s Rupees. This would become an incentive to postpone marriage to a later date for the family and also help the family cope with marriage expenses. Many poor families have had to sell their income-generating assets (such as land or cattle) to pay for their daughter’s wedding expenses. Another example is student loans. All needy students at admitted to accredited universities could get a government loan to pursue their education.
Being an umpire sarkar takes a lot of work, perhaps more work than being a mai-baap sarkar. Citizens are treated with dignity, corruption is reduced, and the fiscal situation improves dramatically. This is the rightful role of the state – and a firm foundation to build a great nation.

Jayant Sinha, is Managing Director at Omidyar Network, a philanthropic investment firm. These are his personal views.

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In the recent national elections, Indian voters ushered in a new era in Indian politics that will reset political behavior and shift economic priorities. The election results surprised India’s elderly political class because today’s voters are much younger, more urban, and drenched in the 24×7 media flow. They are not satisfied with narrow, identity-based politics and unwilling to wait for a better tomorrow. They want results now. To that end, voters decisively rejected political parties based on caste, region, and community and instead rewarded good governance.

The long-awaited UPA budget, due in Parliament on July 6, will likely reflect these trends. Massive funding increases are likely for income support, food security, education, and primary health. A national identity system is being launched to streamline welfare delivery. Each of India’s 28 state governments will now be on the hook to spend these federal funds effectively and to deliver basic services to every village and urban slum. Sonia Gandhi’s message to the newly inducted Congress ministers: “perform or perish.”

Several major trends are reshaping the Indian electorate. First, hundreds of millions of young people are becoming eligible to vote. India’s median age is just 25. There were 43 million registered first-time voters in the 2009 general elections; by some estimates, there will be 100 million possible first-time voters in each of the next five elections. Second, India’s private sector has grown dramatically in the last decade, creating millions of well-paying jobs. Young people aspire to a job in the IT sector, not in the government. Third, India’s freewheeling media and telecom industries have penetrated even the deepest hinterlands. Remote villages have satellite TV with 150 channels and over 400 million mobile phone users receive text messages. Finally, India is urbanizing rapidly with the number of urban parliamentary seats growing, and migrant workers expecting urban services even in their distant villages.

India’s young electorate is thus increasingly well-informed and ready to bend the political system to its will. If political parties and candidates can demonstrate that they are improving public services at a local level, they win elections. If they do not, they are punished.

The 2009 elections reflected these trends. With no compelling national issues at stake, these elections became an aggregation of elections across India’s 28 states. Government performance in 22 states was positively rated in various independent surveys; the political parties running these governments won the majority of seats in their state. In six states, government performance was negatively rated, and these parties lost. Overall, the Congress won enough states to form a durable coalition government. The BJP did well in most of the states that it rules, but it lost heavily in states where it is the main opposition party to the Congress such as Rajasthan, Delhi, and Haryana.

However, the real game-changer in the 2009 elections has been the collapse of the identity-based regional parties and the Communists. In the past, these parties have typically won votes by stitching together various castes and communities into distributional coalitions. Such coalitions rose to prominence after the Mandal recommendations in the 1990s, but it appears that their time is now finally over.
The combined tally of the SP, RJD, LJP, and BSP in this elections plunged to 48 from 78 in the 2004 elections. In South India, the JD(S), PRP, TRS, TDP, MDMK, AIDMK, and DMDK saw their seat tally come in at 21 seats, much below expectations. Finally, the Communists’ seats dwindled from 59 to 24, as voters increasingly tire of their class warfare rhetoric.

Regional parties are largely dependent on a few individuals and their families. They have limited organizational and policy resources. Most party members are more intent in capturing the spoils of power than in serving their communities. On the other hand, the Congress and the BJP have well-developed organizations that have been built over decades. Both parties have successfully run state and national governments. Voters recognize that the Congress and the BJP will provide better governance than the regional parties. Thus Indian politics is transitioning from identity-based political mobilization to results-based governance. This shift may well lead to a less fragmented, relatively stable bipolar political system.

This shift will only happen if the two national parties are able to demonstrate good governance at the local level – and there is no escaping this reality. The Finance Minister will likely provide massive funds for various social programs, the national ID project promises accurate identification, and the district machinery will be constantly pressured to implement. However, it will be up to each state government to ensure efficiently and timely delivery. MPs and MLAs will also have to act as people’s agents and be laser-focused on delivery of public services. Their collective actions will determine which parties will win the next elections.

Indian voters’ demand for results could have a spectacular payoff. China was able to reduce the number of people living in extreme poverty from about 60% of its population in 1990 to about 16% in 2005. In India, the comparable reduction has been from 51% to 42%. By making the political system much more accountable, more than 200 million destitute Indians might lift themselves out of poverty in the next decade. Such upward mobility would transform India and offer hope for every developing country.

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The Indian people are sophisticated and mature voters. They have rewarded good candidates and formed a durable coalition government. Regional parties based on caste, celebrity, communalism, and cash have been shown the door. The Left, reliant on class warfare and stuck in the past, has been decimated. National parties have won. We have a stable left-of-center government and a responsible right-of-center opposition. This is great for our democracy and terrific for India

The right-of-center vision for India needs to be articulated better to win the hearts and minds of all our people. We believe in comprehensive national strength that includes all aspects of national well-being and brings enduring peace and inclusive development. India must be a dignified great power, a beacon of hope and peace for the world, and a powerful global economy. We must have a strong safety net that efficiently provides adequate food, shelter, health care, and education to all our citizens. Farmers should make a good living and have access to all necessary inputs including water, electricity, seeds, and fertilizer. Our children should be well-fed, go to good schools, and be able to pursue higher education. Young people must be able to obtain good jobs, a nice place to live, and have the resources to look after their families. In old age, our people must have adequate pensions and access to good health care.

Enduring peace comes first. We live in a dangerous neighborhood. Our neighbors are grappling with terrorism, civil war, weak governments, and climate change disaster. Internally, we are dealing with a Naxalite movement that has only become more dangerous in the last five years. Terrorists strike our cities and bomb our holy places with impunity. Women do not feel secure traveling in our cities, criminals are robbing old people, and dacoits prowl rural areas.

We can only have inclusive development if our economy is open and competitive. Our economic policies should be designed to stimulate competition and attract sufficient investment. We must reform important sectors such as infrastructure, financial services, real estate, and energy. Strong and effective regulation is also necessary to prevent capitalism’s excesses. Above all, policies must be designed to reduce corruption and capture of public wealth. The Congress has been exceptionally guilty in this respect, as shown by the SEZ, telecom, Satyam, and mining scams.

Good governance is necessary to deliver enduring peace and inclusive development. If government is corrupt and unable to deliver basic services, if civil servants are interested only in stealing money, and if serving the national interest is not paramount for politicians; then how can citizens prosper? We must be committed to serving the national interest. Political parties must be made up of individuals that are willing to work selflessly for national development. Our democratic institutions must be continuously strengthened to build checks and balances against the abuse of power and influence.

We all want a strong, prosperous, secular India. But the Congress, a corrupt and dynastic left-of-center party, simply cannot get you there. We are driven by eternal Indian values and public service; they are driven by money and institutionalized corruption. We trust the entrepreneurial energies of our people, they trust massive bureaucracies. We are realistic about the threats facing India, they wish them away. We build democratic institutions, they destroy them. We believe in a meritocracy, they want an aristocracy. We treat all citizens equally, they pursue divisive votebank policies. How can they build a great nation?

India’s interests must always come first so that we can build a great nation. It is not self-interest, not caste or community interest, not religious interest, not dynastic interest, but the

national interest which must always come first

. Over the centuries, India has achieved greatness often. These glorious periods have happened when India has been pluralistic, inclusive, and open to all. These are India’s eternal values; our shared cultural heritage.

We must be true to India’s eternal values because they are the bedrock of our nation. These eternal values are deeply embedded in our shared heritage and knit us together. Over thousands of years, our great civilization developed a heritage that blends together peoples, religions, and cultures. Think Buddha, Guru Nanak, Kabir, Akbar, Gandhiji, and AR Rahman. India’s cultural heritage and soft power is acknowledged around the world. As AR Rahman said at the Oscars: “All my life I have had a choice between hate and love, and I have chosen love.”

The British and other invaders have always sought to destroy this pluralistic heritage so that they could keep power through their divide and rule policies. Most political parties, pursuing votebank politics, are similarly destroying this inclusive heritage. These parties are placing the interests of their communities and religions before the national interest.

The way forward is clear. The Indian people want enduring peace and inclusive development delivered through good governance. Despite living in poverty, beset by violence and strife, they have shown that they cannot be manipulated. They will elect good candidates and/or a stable government. They do not want quick fixes or empty glamour or easy money. They want better lives for themselves and their families and they will bend the political system to their will. Our democracy is working; our march to greatness is beginning. The best lies ahead.

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India’s higher education sector is failing. Barely 7% of Indians get to college; 99% of these lucky few receive indifferent teaching in decrepit classrooms; they lack libraries, labs, and computers; 80% are unemployable; the moneyed elite flee abroad; meanwhile, we console ourselves with the careers of the 1% that go to the IITs, IIMs, and a few other premiere institutions. National commissions to fix higher education have come and gone. However, entrenched interests have blocked all reforms. Radical structural reforms are urgently required that will simultaneously attack regulation, funding, capacity, faculty, and admissions/access. These reforms can create an open higher education system supervised by independent regulators and funded through government scholarships. Such a system is our best hope for responding to the massive need for higher education.

India has about 160 million people of college-going age. Some 11 million or 7% are studying in degree-granting institutions. There are about 16,000 such institutions, of which 15,000 are private. About 90% of students getting professional degrees in engineering and management are educated in more than 10,000 private institutions. Private medical colleges train roughly 40% of all doctors. There are about 170,000 Indian students spending nearly $3.5 billion per year abroad. By some estimates, total annual higher education spending is over $10 billion or a little less than 1% of GDP. Government funding varies enormously. At one end are the pampered IITs with approximately Rs. 1 to 2 lakhs spent annually per student. At the other end, are dilapidated colleges deep in India’s interior, where spending barely reaches Rs. 2,000.

Meanwhile, private higher education is trapped in a vicious cycle of too many desperate students, poor regulation, inadequate capacity, mediocre faculty, and inappropriate curricula. The government controls salaries, fees, courses, capacity, land allotments, and facilities. Politicians and others with access procure cheap land from the government. They have no experience in education, but run a high return low risk annuity business and are able to dispense patronage. For instance, there is a well-known politician who currently runs 70 schools and 12 colleges through his trust.

Transforming this vast, sprawling system requires radical action in five key areas. First, today’s license raj operated by the Human Resource Development Ministry has to be transformed. The UGC, AICTE, and other regulators must be freed from government control and should become truly independent. Degree-granting institutions will have to be certified by a renamed UGC, which can revoke that status if basic standards are not met. Accreditation agencies (such as the AICTE and Medical Council of India) should also be run by autonomous boards that establish world-class educational standards, degree requirements, curriculum, necessary facilities, faculty qualifications, admission standards, and research protocols. The Boards should require a CA-type national certification process for professional disciplines such as law, medicine, architecture, dentistry, engineering, etc.. Board members for all regulatory agencies should be selected by duly appointed Nominating Committees of their Boards, not by the government.

The second major area to be addressed is government funding. The Central Government must fund all students admitted to degree-granting institutions. Market rates show that students spend about Rs. 1 lakh in fees, boarding, and educational materials per year at private institutions. Government could fund 50% or Rs. 50,000 per year as student scholarships. BPL students would receive 100% funding. A national identity system with a payment processing platform would enable funds to be deposited directly in student accounts. State Governments could add to these funds or provide additional funds to institutions in their state. Institutions will have to compete for students. Standards and facilities would start to rise immediately, faculty salaries will go up, and entire industries will spring up to provide various educational services. If government funds Rs. 50,000 per student for 12 million students, it would cost Rs. 60,000 crores or about 1.1% of GDP – about double today’s spending.

Dramatic capacity increases will happen quickly if the system is fully opened. For-profit institutions should be immediately allowed if they meet standards. Foreign ownership, joint ventures, and alliances should be freely permitted as well. Student scholarships could be used across public or private institutions and will spark a massive build-out. The IITs, IIMs, AIIMS, and most other top universities already have governing boards. They should become independent, autonomous institutions free of any government interference. The top institutions could create their own endowments, set their fee schedules, provide additional student funding, and monetize their massive landholdings. Easy entry and autonomy should also spur wealthy Indian business families to endow universities as their counterparts have done around the world.

Faculty development will thrive in an open higher education system supported by scholarship-based funding. First, the top institutions will become major research hubs and train the faculty that will be required across the system. In the US, the top 10-15 universities such as those in the Ivy League, MIT, Stanford, and Chicago play a similar role. Top faculty will cluster at these elite universities and create enormous positive spillovers in their regions. Second, with faculty salaries freed from government control, sufficient talented individuals will be attracted to the teaching profession. Third, faculty development and standards will be supervised by the accreditation agencies. Fourth, the Central Government must provide adequate funds and autonomy to the Science and Engineering Research Board so that it can truly promote high-quality research. Finally, each university can also encourage research and publications through its tenure-granting process.

With sufficient capacity available across the system, the vexing issue of admissions/access can finally be resolved. Admission should be transparent, points-based, and under regulatory supervision. Affirmative action can be instituted for selected sections of society by setting suitably lower standards for admission. Sufficient capacity should be set aside for affirmative action; exact levels of affirmative action could be decided through the political process in each state, with the Central Government mandating some minimum standards for all institutions that benefit from scholarship-based funding. In principle, institutions that do not receive any government funding could relinquish affirmative action entirely – but that is probably not advisable.

Do these interconnected reforms imply rabid privatization and state abandonment of higher education? Frankly, that has already happened. Instead, these reforms will result in fair-minded regulation, higher standards, talented and sufficient faculty, and transparent access to the system for all motivated young people. Democracies rarely address problems unless a full-blown crisis erupts; higher education is now in such a crisis and a young India urgently awaits. We cannot fail them.

This article appeared in Business Standard on February 26, 2009

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India does not have an effective safety net for its most vulnerable citizens. Half of India’s children suffer from malnutrition and are growing up stunted and underweight. Many of these children do not go to school and most do not complete their education. Those that do complete their school education often do not have the money to go to college. Our elderly poor are equally vulnerable. Old age, malnutrition, or disease make it difficult for them to work even on a daily wage basis. Fortunately, modern-day technology enables us to deliver assistance where it is most needed. We can help our most vulnerable groups through a direct cash transfer program linked to a national identity system. India’s powerful IT and telecom capabilities can be used to end hunger and ignorance.

All our governments have sought to address the terrible plight of our poorest children and elderly. We have an alphabet soup of programs, schemes, and policies to deliver assistance to these vulnerable groups. From Integrated Child Development Services to the Antyodya Anna Yojana to the National Mid-Day Meal program, we have tried many different programs to help the poor. However, hundreds of well-researched studies have shown that these programs have had only limited impact. Our efforts have been hampered by four major problems: (1) leakage and diversion of benefits by intermediaries; (2) exclusion of the most vulnerable groups by other, more powerful groups; (3) poor supply chain management leading to wastage and spoiling; and (4) inadequate funding. Simply put, India’s safety net is meager and has been ripped apart by thieves.

Many developing countries have created and operate highly successful safety nets for their most vulnerable citizens. The Mexican Oportunidades program and the Brazilian Bolsa Familia (family stipend) program are widely considered to be effective safety nets. In 2007, Oportunidades reached close to 5 million Mexicans (about 25% of the population) and Bolsa Familia, reached 11.1 million Brazilian families, or more than 46 million people, representing about 25% of the population. The Brazilian program provides about Rs. 500 per month per child to poor families. The money is given to the female head of the household through a debit card that is issued by the government-owned savings bank. The stipend is only given if children are vaccinated and go to school. Additionally, all very poor families are given a monthly stipend of Rs. 1,500 per month. The total cost of the Bolsa Familia program is about 0.5% of Brazilian GDP.

Careful evaluation of these and other effective schemes has shown that any well-designed program must succeed on five dimensions: identification of target groups, registry of individuals, payment conditions to trigger necessary behavior change, delivery of payments, and implementation monitoring. Each of these activities can be greatly enabled by an efficient national identity system. Such a national identity system must provide a unique, biometric-based identity to each Indian citizen through a smart card and be linked to a bank account. Note that the Bolsa Familia program is also based on a national identity system.

A national identity system and a linked payment processing platform would take about 4-5 years to implement. While implementing this system, we should simultaneously roll out various direct cash transfer programs. There are several benefits to rolling out both initiatives at the same time. First, the registration and identification process for the national identity system and the transfer programs can be done together. Today, most below-the-poverty line (BPL) families already carry a BPL card. Antyodya Anna Yojana families also carry a card. These families can identify themselves during the national identity system registration process and be tagged as BPL individuals.

Second, we can tie together the national identity cards with appropriate conditions for receiving cash transfers. For instance, 850,000 Anganwadi centers already provide counseling and nutritional aid to mothers and young children. Each Anganwadi center could be equipped with terminals for an automated attendance system. Each mother would swipe her card through this terminal to log her weekly presence. The system would check monthly attendance and then deposit the cash in her bank account. The money would then be available for her to withdraw or use in shops equipped with payment terminals. Similarly, school and college students could be provided with monthly stipends that are paid only if they attend school or college.

Third, the national identity card will ensure efficient cash delivery directly to the individual thereby preventing leakage. Cards will be secured through biometric identification and a password (just like any ATM card). Individuals will be able to go to any shop or facility that is equipped with a payment terminal and pay for their transaction. Smart cards do not need to be linked into a wireless network all the time; they can maintain balances on their memory chips and need to be topped off periodically by being connected to a wireless network.

Finally, monitoring and management of this payment system is best achieved by building multiple private-sector payment processing platforms. The government should obviously track eligibility and fund the system; however, the actual payment processing can be done independent companies. In fact, today’s major financial services institutions are probably best equipped to manage and operate these payment processing platforms.

How much would all this cost? At an installed cost of about Rs. 300-400 for each national identity card, the national identity system would cost between Rs. 40,000 to 50,000 crores to implement over 5 years for the entire Indian population. The annual cost of running it would be about Rs. 10,000 crores. If the government gave Rs. 500 per child per month to each BPL family (roughly 25% of all children), the cost of this cash transfer program would be about Rs. 75,000 crores, which is about 1.5% of GDP. Similarly, a Rs. 1000 per month stipend to every college student in India (assuming 12 million students in college), would cost Rs. 15,000 crores or 0.3% of GDP. Finally, a pension program granting Rs. 1000 per month to every single person over 60 (about 100 million people), would cost Rs. 117,000 crores or about 2.2% of GDP.

India’s subsidies and poverty reduction programs today run at about 3-4% of GDP. Surely, we can move away from wasteful and ineffective subsidies to direct cash transfer programs? These types of programs will create a powerful safety net for the poor that will enable massive investments in human capital. A national identity system with a linked direct cash transfer program must therefore be on top of the next government’s agenda.

This article appeared in Business Standard on January 22nd, 2009

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A universal national identity system for India will deliver end user benefits in four major areas: (1) welfare delivery and tax collections, (2) financial inclusion, (3) voter registration, and (4) national security. In addition to these important benefits, the manner in which such a system is implemented can also generate substantial benefits. An innovation ecosystem implementation approach would generate jobs, create several new companies, and potentially launch entirely new industries. It would harness the power of India’s world-leading telecom and IT/BPO industries and establish India as a global leader in payments processing, affordable financial services, and mass e-governance.

A universal national identity system for India must include a national identification number, absolute biometric proof of identity, and the ability to serve as a platform for multiple applications. Analyzing national identity systems and other national data infrastructure projects across the world, suggests three distinct implementation models: (1) the centralized national authority model; (2) the decentralized model; and (3) the innovation ecosystem model.
The national authority model has been followed in Germany, France, Spain, Italy, and many other European countries. China, Pakistan, and Sri Lanka have implemented a similar approach. For instance, the Spanish identity card is issued by the national government, which manages the entire system. Each individual gets this card, with a unique national identification number, when they turn 14. The card is a machine readable plastic photo card with signature, birth date and birth location. The national identification number is used for tax collection and welfare delivery. Banks use it to build credit histories and the election system uses it for voter identification. Spain (and most other European countries) is in the process of upgrading its identity cards by using smart card technology.

Brazil and the US use a decentralized model to run their national identity systems. In Brazil, a central authority sets standards on unique identification numbers, data capture, and enrollment procedures. However, the actual card is issued by different provincial authorities. This is a pragmatic solution given Brazil’s large and widely dispersed population. Cards are issued when an individual turns 18. The Brazilian identity card is a plastic card with photo, birth date, parent’s names, fingerprint, and signature. The card is used for getting a driver’s license, opening a bank account, completing all civil transactions, and for gaining access to welfare programs. Each Brazilian gets either a CFP number, a unique identifier issued by the federal tax authorities, and/or a RG number issued by a province.

Several national data infrastructure projects, such as Germany’s highway toll collection system, use an innovation ecosystem approach. The German toll collection system was launched in 2001 to ensure that every truck using Germany roads paid tolls and congestion charges. All trucks have embedded GPS-based devices that communicate through the mobile data network. The German government played an important in designing the system and collects $4 billion annually in revenues from the toll collection system. A consortium of companies including DaimlerChrysler, Deutsche Telekom, and the French motorway operator Cofiroute operate the system through an independent, for-profit company called Toll Collect. This company issues the vehicle tracking numbers, collects the tolls from drivers, and then disburses it to various recipients using agreed-upon allocation formulas. This approach has led to several technology breakthroughs and positioned Germany as the world-leader in advanced vehicle tracking systems.

India could follow a similar approach. A National Mission must be set up to implement the system within 4-5 years. The National Mission would define key standards, including: card specifications, data structures, centralized data sharing, and numbering protocols. The Mission would then discuss and release the reference design to an innovation ecosystem that would consist of enrollment agencies, payment processors, software vendors, equipment manufacturers, and various state authorities. If the National Mission is based outside Delhi (say in Bangalore or Hyderabad or in an even smaller city) and requires consortium members to co-locate, an innovation cluster will likely develop.

A well-coordinated ecosystem is required to securely enroll India’s vast population in just 4-5 years. Here is how it would work. Once the key standards are established (say within 6 months or so), the Mission would ask IT/BPO companies to bid for various implementation regions. Five or six different companies could be selected to run the enrollment process in different regions of the country. Another IT company could be picked to run the centralized database that would be linked into the regional databases and to other databases such as the voter registration system. These contracts would be renewed every few years depending on company performance against key success metrics.

In parallel, the Mission would bid out for 3-4 universal payments platforms that could be operated by payment processors such as Visa and MasterCard. Payment platforms would utilize India’s outstanding mobile data networks. Payment processors would ensure that: (1) terminals were freely available to merchants; (2) identity cards could be used as credit/debit cards; and, (3) each individual would get a bank account. At enrollment, each citizen would choose a banking services provider who would then establish an account for that individual. This account would then be permanently linked to the individual’s identification number. All government welfare schemes would then use this bank account to make welfare payments. Naturally, the citizen could switch this account from one bank to another, say once a year.

With this universal data infrastructure in place, many other applications could also be delivered. For instance, each eligible student could get an education voucher to attend accredited schools or colleges. The government would deliver the voucher payment directly into the student’s account. The educational institution could then directly debit approved charges from the student’s bank account. Similarly, financial institutions could build a credit history for the individual. Land authorities could assign title to farmers, and so on.

Such a national identity system would spawn many new industries in India and position India as the global leader for affordable identity management, payment systems, and e-governance. Entirely new payment terminals would have to be designed and mass-produced. Massive databases would have to be maintained to track citizens and to link various applications. Huge new software programs would be required to process payments. Financial transactions and bank accounts would have to be operated at the lowest possible cost. State governments could also bid out many of their functions, such as drivers’ license issuance. Many new companies will spring up and India will be able to export its expertise around the world. A national identity system implemented through an innovation ecosystem thus generates huge end user benefits as well as dramatic industrial development benefits.

This article appeared in Business Standard

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India does not know who you are. Since we do not have a national identity system, Indians are largely anonymous. A national identity system is a most valuable public good because it generates positive externalities in four major areas: (1) welfare delivery and tax collections, (2) financial inclusion, (3) voter registration, and (4) national security. Many countries such as the USA, UK, France, China, and even Pakistan have implemented national identity systems. The NDA government began the implementation of a universal system through a national identification number (NIN) and a multi-purpose national identity card (MNIC), but in the last five years we have made little progress. Given the massive benefits associated with such a system, we must roll-out it out nationally within the next 2-3 years.

Various identity systems are in use in India currently, but they are neither universal nor multi-purpose. Such systems include the voter identity card, PAN card, and the passport, which are all photo identity cards. The ration card has no photo identity and is generally used for families, not individuals. Different identity cards are used for central welfare schemes such as the BPL card, the Rashtriya Swasthya Bima Yojana (RSBY health insurance for BPL families), and the Employee State Insurance Card; in addition, there are a variety of cards issued by state governments. Recently, many financial institutions have issued their own identity cards linking their customers to multiple different accounts such as a savings account, credit card, and vehicle loans.

An universal national identity system must include several elements: (1) total enumeration (assigning unique identity) of the population; (2) personalization which would enable identification through photo and biometric markers; (3) registration at birth and at 18 years; (4) data management including a national register; and (5) integration with multiple other systems including credit records, government benefits, and voter management. A national identity card could either be delivered through a magnetic stripe card (just like a regular credit card); or better still, through a smart card that contains enough memory and processing capabilities to run multiple applications. A magnetic stripe card costs Rs. 10-15 and a smart card costs about Rs. 100. Each card would have a photo of the individual, biometric information, and some key data such as name, date of birth, parent’s name, and birth city.

The first major benefit associated with a national identity system is efficient welfare delivery and tax collection. The NIN could be linked with a bank account so that each citizen would have a government mandated bank account. All welfare payments and tax collections could be made through this account and the identity card could be used either as a debit card (or a stored value card) against this bank account. These individual accounts would greatly streamline welfare delivery across a wide range of schemes such as mother-child support, kisan credit, student assistance, and micro credit. In fact, FINO (a pioneering company supported by several banks) has already issued 2 million cards to deliver financial services to “unbanked” customers. All welfare payments would be made through the bank account on a regular basis. In fact, such types of cash transfer schemes are generally considered to be much more efficient and less susceptible to corruption, than various indirect schemes such as the Ration card or the National Rural Employment Guarantee Scheme.
An entire payment processing system could be built to support these cards, so that each Indian could avail of these services. Imagine every store with a payment terminal. Once a customer makes a purchase, the storekeeper would swipe the card through the store’s terminal and debit either the stored value on the card or the customer’s actual bank account. To prevent fraud, biometric identification (such as thumbprint) or passcodes could be used to authenticate the individual. The NIN would also become the basis for storing credit histories, tracking borrowing and savings behavior.
A national identity system would also be a powerful mechanism for financial inclusion as laid out in the recent Rajan Committee Report on Financial Sector Reforms. Since each individual will have a bank account and a credit history, it will make it possible for them to save and borrow money. Farmers could get bank credit for making agricultural investments and expanding into related businesses e.g., animal husbandry. By tying this system to land titles, farmers would also be able to borrow against their property thereby converting a very illiquid asset into a much more productive resource. Micro credit groups could be set up electronically immediately reducing the administrative burden associated with detailed cash record-keeping.

Universal voter registration is the third major benefit of a national identity system. Today the Election Commission of India voter identity card is one of the largest databases existing in India, with over 500 million cards with photos issued till date. A national identity card would have information on residential status and therefore voter registration. Citizens would have to go to a registration center if they changed their residence and update the voter rolls.

Finally, a NIN system would be a powerful tool for strengthening national security. All citizens can be identified through a NIN, and it would therefore be easier to track illegal immigration. No mobile phones or bank accounts would be issued without the national identity card. If any mobile phone or bank account was then used for anti-national activities, security authorities would be able to trace it quickly to its owner. Electronic activity linked to a NIN would also leave electronic traces across many systems, making it easier to unravel conspiracies and collusive activities. Obviously, authorities would have to ensure that the identity card could not be easily forged or hacked into.

There are many ways to implement a national identity system, ranging from a centralized authority to decentralized issuance by several agencies linked by common standards and consolidated data sharing. But it is entirely doable. One of the best national systems has been installed by the Government of Pakistan. They have a universal smart-card for storing photo and fingerprint information, supported by a very robust centralized database and a network of local offices. A similar system must be implemented through a National Mission as soon as possible. Once India knows who you are, help can reach you.

This article appeared in Business Standard

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Terrorist attacks in our bazaars, the violence against Biharis in Mumbai, the Naxalite uprisings, religious strife in Orissa, the list goes on: India is being torn apart. We need strong leadership to bring Indians together to protect our collective national interests. But our political system is dysfunctional and our most important institutions are failing. Our best hope is that a great political leader emerges to build trust across various interest groups and knits our country together.

India is a deeply fractured country today. We are divided by state, religion, caste, community, language, forwards vs. backwards, left vs. right, secular vs. communal, promoters vs. workers, and on and on. Tossed about among all these divisive interest groups, the Indian state is floundering. Each interest group seeks to capture the state apparatus to serve its narrow demands ranging from getting hundreds of SEZs approved to reserving seats at higher educational institutions to resisting national identity cards that will restrict illegal immigration. In aggregate, these demands are imperiling our physical security and bankrupting the state.

India’s great divides have always been our weakness. Chandragupta Maurya overwhelmed the Nanda Empire by enlisting the kings of the Punjab, who were supposedly loyal to the Nandas. Once Chandragupta defeated the Nandas, he turned on his erstwhile allies. Mohammed Ghori gained the support of several Rajput kings who were at war with Prithvi Raj Chauhan, making it easy to defeat the isolated Chauhan kingdom. Akbar allied with the Rajputs of Amber, Gwalior, and Malwa to destroy the kingdom of Mewar. Robert Clive conspired with Mir Jafar and various Calcutta merchants to vanquish Siraj ud Daulah at the Battle of Plassey. Subsequent British rule in India was based on its infamous “divide-and-rule” strategy.

Indian history is thus replete with examples of bickering rulers unable to deliver peace and prosperity to their citizens. Game theory provides a profound insight to understand this dynamic. It is called the Prisoner’s Dilemma, a stylized non-zero-sum game where two prisoners (who do not know each other and cannot communicate with each other) can either stay silent or betray each other. If they both stay silent, they each get a 6 month sentence. If one stays silent and the other one betrays, then the silent one goes to prison for 10 years and the betrayer is set free. If both betray each other, then they both go to jail for 5 years. Unfortunately, given the various payoffs, the betrayal strategy dominates the silent strategy in every case. Acting in their rational self-interest, the prisoners choose to betray each other; as a result, they both go to jail for 5 years. In such types of situations, playing cooperative win-win strategies is very difficult because it requires both prisoners to trust each other totally.

India’s rulers have mostly chosen to fight each other for a share of the proverbial pie, rather than cooperating to grow the pie through win-win strategies. Robert Wright in his excellent book NonZero shows how successful societies have evolved various strategies to build trust and achieve win-win outcomes. Most successful societies have become progressively more complex through mechanisms such as a constitution-based political system, the army, the civil services, financial markets, workers unions, guilds, and companies. These integrative structures build trust by getting people to work together and tangibly deliver the benefits of grow-the-pie cooperative strategies. Thus a bicameral legislature, with representation from all parts of the country, can efficiently formulate laws; a very valuable public good.

Apart from various religious organizations, India did not evolve any integrative structures prior to the British Raj. Yes, most rulers had armies and tax collectors. But their goal was principally rent-extraction. British rule led to the creation of many integrative structures in India. Most of these structures, such as the civil services, a professional army, and the judiciary were transplanted directly from Britain, where they had organically developed over hundreds of years.

After Independence, the stalwarts of the Freedom Movement (steeped as they were in British traditions and values) trusted that these institutions coupled with a democratic political system would result in a modern, progressive society. However, over the last 60 years, we have subsided back to Indian-style governance; namely, using the powers of the state to run a cynical rent-extraction system for the ruling group. In modern-day India, the ruling group emerges primarily through elections, which pit one group against another. The goal is no different from our pre-British past: capture the state so as to capture rents. Voters recognize that our political system is dysfunctional; hence anti-incumbency rates are high to prevent permanent capture. Under these circumstances, our political system will not succeed in getting various interest groups to work together.

Our rent-seeking political system is also corroding our most important institutions. We cannot rely on the civil services, the police, judiciary, or any other institution to get various interest groups to work together cooperatively. Each of these institutions has been debased and is barely serving the national interest. Corrupt bureaucrats wanting money to pass a file, bomb blasts in Mumbai’s trains, farmers dying of drought, Naxalites in our forests — how many more proof points do we need?

We need a prophet of unity who can rise above these narrow interests, kindle the national themes that can unify us, inspire us to rebuild the country, and revitalize our key institutions. Note that Barack Obama’s historic victory speech included the following lines: “We are one nation. We are one people. Our time for change has come.”

Independent India has been rescued before by an inspiring political leader. JP’s sterling leadership brought together many different parties to contest against the Congress after the Emergency and saved Indian democracy. JP was able to break the Prisoner’s Dilemma and convince all the anti-Congress parties to put up a united front. As long as he was alive, the Janata Party stayed together. Tragically, the Janata Party experiment collapsed soon after his death in October 1979.

The last few years have been deeply divisive. Dependent on external support, the UPA government has been unable to push through any reforms, its fiscal policies have been highly populist, corruption has been rampant, and domestic security has deteriorated. Regional parties have become increasingly powerful and small parties with even a few seats in Parliament can topple a government. The coming General Elections may throw-up another fractured Parliament at a time of grave national and global crises. Now is the time we truly need a great leader who can unite the nation.

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